Everyone loves a deal or a legitimate steal.  It should come as no surprise that the authorized dealing and stealing in the marketplace is a well thought out enticement to beckon buyers. Dan Ariely is the Alfred P. Sloan Professor of Behavioral Economics at MIT. He is also a researcher at the Federal Reserve Bank of Boston and a visiting professor at Duke University. His book Predictably Irrational starts off with an examination of the use of Free. What follows are excerpts from the first chapter of Predictably Irrational and an interview Dan Ariely gave Kai Ryssdal on NPR’s Marketplace January 4, 2010

Case in Point #1:

The Economist has the following subscription offers: internet only $59, print only $125, print and internet $125

Dan Ariely supposed that the wizards of manipulation at the Economist were trying to get him to avoid the “internet only” option. They knew something important about human behavior. Humans rarely choose things in absolute terms. We don’t have an internal value meter that tells us how much things are worth. Rather we focus on the relative advantage of one thing over another and estimate the value accordingly (For instance we assume a 6 cylinder car is more expensive than a 4 cylinder one, without knowing the basic mechanics that make up the worth of an automobile based on the amount of cylinders it has.)

In the case of the Economist, he may not have known whether the ‘Internet Only” option was a better deal, but he knew that the print-and-internet option for $125 was better than the print only one for $125, in fact you can deduce that in the combination package that the internet is free! Dan had to admit that if he had been inclined to subscribe that he would have taken the package deal. Later when he tested the offer on a large number of participants, the vast majority preferred the internet-and-print deal.

When he gave the Economist subscription offer to 100 students of MIT Sloan School of Management they opted as follows: 16 went for the internet only, 0 print only, 84 internet-and-print. But no doubt they were influenced by the “decoy” internet only option. When this option was removed this time 68 of the students chose the internet only option and 32 chose the internet-and-print option.

Case in Point #2:

Dan Ariely: Imagine that one of your co-workers comes to the office with home-baked cookies, and she’s offering you the cookies for a very cheap price. Let’s say 5 cents per cookie. And she has 100 cookies on the tray, and there are 20 people in the office. How many cookies will you take?

Kai Ryssdal: I’d probably take like five. I’d give her a quarter, and take five cookies.

Dan Ariely: OK, but what would happen if it was free?

Kai Ryssdal: Well, now see, I’m torn here, because I would either take a lot and be a real piggy, or I would take maybe one or two because I wouldn’t want to be a glutton.

Dan Ariely: That’s right. So let’s assume that you would not feel like being a pig. In fact you can actually imagine how if she offered you the cookies for 5 cents a piece, you would feel perfectly fine to take the whole batch, but if she charged you nothing, you would not feel that you can take as much as you really want.

Kai Ryssdal: Is this about the value we put on it, or is it about us internally?

Dan Ariely: It’s about the fact that when something is free all of the sudden different norms get applied to the situation, and you start thinking about other people. So you have lots of other co-workers in the office, and if you took all the cookies to yourself, nobody else would have any cookie. What’s interesting is that when the price is a positive price, like 5 cents, you don’t actually think about the welfare of other people.

Kai Ryssdal: You bet, because I’ve paid my nickel and by gosh, I’m going to take as many cookies as I want, right?

Dan Ariely: But you know this is a good deal. And you have lots of other people in the office that you like and care about. Why don’t you think about their welfare? Don’t you want them to be happy as well?

Kai Ryssdal: Yeah, I suppose. But you know, if the cookies are good, then…

Dan Ariely: But the cookies are also good when they’re free. So what’s interesting is when something is free you all of the sudden think about the welfare of others. But when it costs something, it’s just you and your cost-benefit analysis.

Kai Ryssdal: All right, so take it away from my cookies and me looking out for the welfare of the office, and apply it to real life, then.

Dan Ariely: Well, cookies are real life. This thought, this general idea, I think also has application for the carbon-trade idea.

Kai Ryssdal: Carbon trade as in global warming. We’re going from cookies to global warming?

Dan Ariely: Obviously, what other connections would you make? So think about it, pollution, carbon trade, or recycling, or whatever it is, is in the public goods domain. We think about our kids, the next generation, the welfare of the world. But if it’s not costing us money now we start to apply different norms and different rules. Now I don’t think about the welfare of others. It’s just about what is it worth for me to pollute and not to pollute. I’m actually worried that when we move from a system that we care about our pollution and CO2 emissions, and so on, because of the welfare generally of the world, we’re going to apply a certain norm. If they charge us a lot of money then of course we would be very careful, and we might try to reduce dramatically pollution. But if they don’t charge us that much, it could actually end up backfiring.

Kai Ryssdal: Right, so you’re worried that the politicians won’t be able to agree on a higher price of carbon, so it will be something so small as to be meaningless and maybe even harmful?

Dan Ariely: That’s right. If we started charging a lot of money for it, it would really dramatically change the economy, and I don’t think we understand how this will work. And at the low level I think that rather than getting us to care more, it will actually end up getting us to care less.

http://marketplace.publicradio.org

www.predictablyirrational.com